The stock of Dril-Quip (NYSE: DRQ, 30-year Financials) is considered to be fairly valued, as calculated by GuruFocus Value. The GuruFocus Value is GuruFocus’s estimate of the fair value at which the stock is to trade. It is calculated based on the historical multiples at which the stock has traded, the company’s past growth, and analysts’ estimates of the company’s future performance. If a share’s price is significantly above the GF value line, it is overvalued and its future performance may be poor. On the other hand, if it is significantly below the GF value line, its future return is likely to be higher. At its current price of $ 38.24 per share and market cap of $ 1.4 billion, Dril-Quip stock gives all indications of its fair value. The GF value for Dril-Quip is shown in the table below.
Since Dril-Quip is valued at its fair value, the long-term return on its stock will likely be close to the growth rate of its business.
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Companies with poor financial strength present investors with a high risk of permanent capital loss. To avoid a permanent loss of capital, an investor should do his research and consider the financial strength of a company before deciding to buy stocks. A company’s cash-to-debt ratio and interest coverage are both a great way to understand its financial strength. Dril-Quip has a cash-to-debt ratio of 63.50, which ranks better than 84% of companies in the oil and gas industry. The overall financial strength of Dril-Quip is 7 out of 10, which indicates that the financial strength of Dril-Quip is fair. Here is Dril-Quip’s debt and cash flow over the past few years:
It is less risky to invest in profitable companies, especially those whose profitability is constant over the long term. A business with high profit margins is generally a safer investment than one with low profit margins. Dril-Quip has been profitable 7 in the last 10 years. In the past twelve months, the company achieved sales of $ 350.2 million and a loss of $ 1.28 per share. Its operating margin is -6.35%, which puts it in the middle of the companies in the oil and gas industry. Overall, Dril-Quip’s profitability is ranked 6 out of 10, indicating acceptable profitability. Here is Dril-Quip’s sales and net income over the past few years:
Growth is probably one of the most important factors in the valuation of a business. GuruFocus research has shown that growth is closely tied to the long-term performance of a company’s stocks. If a company’s business is growing, the business typically creates value for its shareholders, especially if the growth is profitable. Likewise, if the income and profits of a business decrease, the value of the business will decrease. Dril-Quip’s 3-year average revenue growth rate is within the average for companies in the oil and gas industry. Dril-Quip’s 3-year average EBITDA growth rate is -7.8%, which is in line with the average for companies in the oil and gas industry.
Another way to look at the profitability of a business is to compare its return on invested capital and the weighted cost of capital. Return on Invested Capital (ROIC) measures the extent to which a business generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company should pay on average to all its security holders to finance its assets. We want to have a return on invested capital greater than the weighted cost of capital. Over the past 12 months, Dril-Quip’s return on invested capital is -2.69 and its cost of capital is 9.93. Dril-Quip’s historical ROIC vs WACC comparison is shown below:
In short, Dril-Quip’s stock (NYSE: DRQ, 30-year-old Financials) gives every indication of being fair valued. The company’s financial position is fair and its profitability is fair. Its growth is in the mid-range of companies in the oil and gas industry. To find out more about the Dril-Quip share, you can consult its financial data over 30 years here.
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